SERVICE TAX VALUATION

 The article deals with the nature of service tax valuation, what is the meaning of the same, what all things are to be included and what are things are to be excluded while calculating the value at which service tax is to be paid, at the end while pointing out the loopholes in the process of valuation. Remedial measures to fill that gaps would be enumerated.

Introduction

Service tax is charge by the government as to the quantum of the money that is received by the service provider, in the name of services rendered to the service recipient and the process to arrive at such an amount at which service tax is payable is known as valuation of service tax.

Section 66B of the Finance Act 1994, levies a charge on service tax at a prescribed percentage of the value of taxable services provided or agreed to be provided. This stipulates that service tax is payable on ‘Value of Taxable service’. Unlike Central Excise Act 1944, which makes it mandatory to pay the duty on manufacturing of goods where they hold any value or not, but under service tax , the tax is payable as a value of taxable service and that being the reason the valuation under service tax holds a prime importance.  Thus if the service provider don’t charge any move he won’t be liable to pay the service tax. In Chandravadan Desai v. CCE[1] where the stock broker didn’t charged any commission or brokerage, it was held no service tax is to be paid.

In accordance with Section 67(1)(i) of the Finance Act, a clear demarcation has been made between the value of taxable services and the entire value of the contract and thus the value at which the service tax is to be paid is only to the extent of services rendered[2].  Where the service provider have charged, service tax from the service recipient in all such cases, the total amount would be the gross amount that is collected i.e. amount inclusive the service tax and the service tax will be paid on that amount[3], in accordance with section 67(2) of the Finance Act[4].

But a controversy have arisen in that regard, in a recent case of Magarpatta Township Development & Construction Co. Ltd. v. CCE[5], whereby the general rule was Tax deductible at source is to be paid while making payment for service tax, the rule was followed till date. Now in light of above precedent it has been said that service tax would be applicable only on the invoice value and service tax would not be applicable on TDS amount which is borne by service recipient over and above amount.

When it comes to the concept of valuation of service tax, the section and the act that deals with the said topic is section 66, 67 of the finance act 1994 and Service tax (determination of value) Rule 2006. Whereby section 66 deals with the scenario as to for which services, service tax is to be charged; what all services are to be included and what all services are exempted from service tax along with the place at which such tax would be charged. On the other hand Section 67 deals with valuation in general and lays down that valuation would be done on the gross amount that is charged or the amount equal to consideration charged[6].

 

 Work Contract

Section 65B (5) of the Finance Act defines the work contract works contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof in relation to any building or structure on land[7].

When it comes to the service provider using the goods in the execution of work contract. The property which is transferred, qualifies the work contract, but if the service provider only provide services and don’t use good than the service tax will not be applicable[8].

Rule 2A of Service Tax (Determination of Value) Rules, 2006, explains as to how valuation is to be done when it comes to work contract.

  • Value of service portion in execution of work contract shall be equivalent to gross amount charged for the work contract less the value of the property in goods which was transferred.

 

  • Where work contract is entered into execution of original works, service tax will be payable at 40%.

 

  • Where the work contract is entered for maintenance or repair or related activities, service tax will be payable at 70%.

 

  • Where it is not for execution of original works or for maintenance or repair than service tax shall be payable at 70%[9].

Where the gross amount charged under the work contracts is inclusive of VAT/Sales Tax, the assesse have the choice to opt form the composition scheme to pay service tax under Contract(Composition Scheme for Payment of service tax) Rule 2007, under this the service provider have the option to pay 4% of service tax on full value rather than the stipulated quantum of tax on gross value[10].

Rule 6 of Service Tax (Determination of Value) Rules, 2006 states that what service are to be included and what are not to be included while calculating the valuation with regard to service tax payable.

The services that shall be included are as follow:-

(1) Subject to the provisions of section 67, the value of the taxable services shall include‚–

  • The commission or brokerage charged by a broker on the sale or purchase of securities including the commission or brokerage paid by the stock-broker to any sub-broker.

 

  • The adjustments made by the telegraph authority from any deposits made by the subscriber at the time of application for telephone connection or pager or facsimile or telegraph or telex or for leased circuit.

 

  • The amount of premium charged by the insurer from the policy holder, the commission received by the air travel agent from the airline.

 

  • The commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance agent from the insurer.

 

  • the reimbursement received by the authorized service station, from manufacturer for carrying out any service of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer.

 

  • The commission or any amount received by the rail travel agent from the Railways or the customer.

 

  • the remuneration or commission, by whatever name called, paid to such agent by the client engaging such agent for the services provided by a clearing and forwarding agent to a client rendering services of clearing and forwarding operations in any manner

 

  • The commission, fee or any other sum, by whatever name called, paid to such agent by the insurer appointing such agent in relation to insurance auxiliary services provided by an insurance agent.

 

  • The amount realized as demurrage or by any other name whatever called or the provision of a service beyond the period originally contracted or in any other manner relatable to the provision of service.

The services that shall not be included while calculating the taxable services are:-

  • Initial deposit made by the subscriber at the time of application for telephone connection or pager or facsimile (FAX) or telegraph or telex or for leased circuit.

 

  • The airfare collected by air travel agent in respect of service provided by him.

 

  • The rail fare collected by rail travel agent in respect of service provided by him.

 

  • Interest on delayed payment of any consideration for the provision of services or sale of property, whether moveable or immoveable.

 

  • The taxes levied by any Government on any passenger travelling by air, if shown separately on the ticket, or the invoice for such ticket, issued to the passenger.

 

  • Accidental damages due to unforeseen actions not relatable to the provision of service.

 

  • Subsidies and grants disbursed by the Government, not directly affecting the value of service.

Except the above mentioned exclusion, expenditure of all forms except those which are made by the service provider as a pure agents[11] are to be included while calculating the valuation of service tax. Even though Prior to 2006 these expenditure were allowed to be deducted but after 2006, under valuation rules, where any expenditure or cost is incurred by service provider in the course of providing taxable service, all such expenditure or cost is to be treated as consideration for taxable service and thus is liable to be included in the taxable value for calculating the service tax. Further this was made clear by CBEC Instruction letter[12], In which it was clearly mentioned that ‘All expenditures or costs incurred by the service provider in the course of providing the taxable service forms an integral part of the taxable value and are includible in the value’.

Process of Valuation

When it comes to valuation, though no express procedure is prescribed by law, the service provider who is liable to pay the service tax, have to pay the tax on the gross value of consideration in most cases or at some percentage of the gross value in different scenarios. Same would be discussed in the later part of this article. Once the valuation is done, the service tax is paid on the said value

 

 

Rejection of Value

When it comes to the valuation of service tax, initially it is paid by the service provider at his own accord, because it is considered that he known the laws regarding the same, if the central excise officer have any issues with regard to the valuation in general or the valuation done under rule 3 of Service Tax (Determination of Value) Rules, 2006, than he would furnish a show cause notice in this regard, to the service provider under rule 4(2) of Service Tax (Determination of Value) Rules, 2006. Along with that a restriction has been imposed by the concerned department by CBEC instruction letter[13] which states that such verification of the initial value should be done only after instruction from divisional AC/DC. After the verification of the records if the department is of the view that value so determined and adopted for payment of service tax warrants revision, the issue is to be decided after show cause notice and observing the prescribed procedures. Before issuing any show cause notice on matter relating to valuation, concurrence of the commissioner is to be obtained[14].

Valuation under different scenarios

  • Valuation when it comes to food supply or related articles for human consumption or any drink when within the restaurant, would be calculated on 40% on the total amount

 

  • Valuation of service portion when goods being food or any other related article for human consumption or any sort of drink, by outdoor catering, than 60% of the total amount would be considered.

 

  • Valuation with regard to foreign currency sale, purchase is considered, the taxable value will be calculated on the base of difference between exchange rate and RBI’s reference rate on that day and where there is no such amount is stipulated than on 1% of the lesser amount between the two.

 

  • If there is no specific amount mentioned in the bill with regard to the service tax than it would be assumed that the total amount would be inclusive of the service tax and the formula to arrive at that value was determined in the case of R. Choksey and Co. v. CCE[15].

 

  • When Valuation for Custom house agents are done the payments made by Custom House agents on the behalf of the client, such as statutory Levies(cess, custom duties etc.) and various other reimbursable expenses incurred are not to be included for computing the valuation under service tax.

 

  • Valuation of taxable service imported in India, in accordance with section 66A of the Finance Act and Taxation of Services(Provided from outside India and received in India) Rules 2006, the taxable value would be actual consideration charged for the services rendered.

Conclusion

After a brief demarcation, as to on which amount service tax is to be charged. There may lie a situation in which a dispute may arise with regard to valuation, due to the comprehensive definition of service and various attributes in that regard. Even though some issues are well settled by the provisions of acts regarding valuation itself but still a mist covers the issue with regard to the valuation as seen in the case of Magarpatta Township Development & Construction Co. Ltd. v. CCE[16]. The apex court in the case of State of Bombay v. Automobile & Agricultural Industries Corp.[17]held that

“But the courts in interpreting a taxing statute will not be justified in adding words thereto so as to make out some presumed object of the Legislature. If the Legislature has failed to clarify its meaning by the use of appropriate language, the benefit thereof must go to the taxpayer. It is settled law that in case of doubt, that interpretation of a taxing statute which is beneficial to the tax-payer must be adopted”.

Thus for the betterment of the Indian judicial system a stability should be maintained in the judgments, which should be in accordance with the provision of the statues governing the issue. Otherwise justice would never be achieved in true sprits. A platform should be created where each and every information regarding the valuation is available and the said platform should be updated regularly so that the scope of misunderstanding is reduced to such an extent that it eventually becomes nil i.e a level where their lies a no dispute with regard to valuation. Though Notification system is their but the said system is outdated and thus it has hampered the growth of the society at large as most of the general people at large who are liable to pay such service tax are most of the time not aware of their duties.

[1] 1998 9 ELT 515(Trib-Cal.)

[2] Agra Steel Corporation v. CCE. & Aditya College of Competitive examination v. CCE

[3] Municipal Corporation of Delhi v. CST (2010) CESTAT, New Delhi.

[4]SanjeevSinghal, Valuation of Service- S.67 with Service Tax – ‘Determination of Value’ Rules-2006, 15 Jan 2013; http://taxguru.in/service-tax/valuation-service-s67-service-tax-determination-rules2006.html

[5] TS 90 CESTAT 2016 Mumbai.

[6]Tedious valuation under service tax, The Financial Express, April 14 2016.

[7]Shruti Agarwal, Valuation Under Work Contract Service,08 Jul 2015; http://taxguru.in/service-tax/valuation-works-contract-service.html#sthash.5Za7LePM.dpuf

[8] Notification No. 25/2012-ST, dated 20.06.2012.

[9] Notification No. 11/2014-ST, Dated 11.07.2014.

[10] CBEC Instruction letter D.O.F. No. 334/13/2009-TRU, dated 06-07-2009.

[11] Trade Notice C.No.III/10/1325//07-IA , dated 07-12-2007 in which certain things were made clear with regard to pure agent as to expenditure by pure agent is not absolute.

[12] B1/4/2006-TRU, dated 19-04-2006.

[13] F. No. B1/4/2006-TRU, dated 19-04-2006.

[14]http://arxadvisors.com/userfiles/Chapter%208(1).pdf.

[15] (1996) 88 ELT 566 (Trib.-Mumbai).

[16] Supra.

[17] (1961) 12 STC 122.


AUTHOR

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Devashish Jain is  law student currently pursuing Int. B.com LLB (Splz.in Taxation law) from UPES, who loves to research and want to know as much as he can.He had been actively participating in various National and international conferences, consultations and debates.His area of interest lies in Taxation laws.


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Disclaimer:  The views and opinions expressed in this article are those of the authors. All data and information provided on this site is for informational purposes only. sapaa.in makes no representations as to accuracy, completeness, correctness or validity of any information on this site and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use.